Afya Limited (NASDAQ:AFYA) Q1 2024 Earnings Call Transcript May 13, 2024

Afya Limited isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Renata Couto: Good night, everyone. Thank you for joining us for Afya's First Quarter 2024 Conference Call. I'm here today with Afya's CEO, Virgilio Gibbon; and Luis Andre Blanco, our CFO. During today's presentation, our executives will make forward-looking statements. Forward-looking statements can be related to future events, future financial or operating performance, known and unknown risks, uncertainties and other factors that may cause Afya's actual results to differ materially from those contemplated by those forward-looking statements. Forward-looking statements in this presentation include, but are not limited to, statements related to the business and financial performance, expectations, and guidance for future periods or expectations regarding the company's strategic product initiatives, its related benefits and our expectations regarding the market as well as any remaining impact from COVID-19.

These risks include those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on the information available to us, as the date hereof. You should not rely on them as predictions of future events, and we disclaim any obligation to update any forward-looking statements, except as required by law. In addition, management may reference non-IFRS financial measures on this call. These measures are not intended to be considered in isolation or as a substitute of the results prepared in accordance with IFRS. This presentation has reconciled these non-IFRS financial measures to the most directly comparable IFRS financial measures. Now, let me turn the call over to Virgilio Gibbon, our CEO, starting with Slide number 3.

Virgilio Gibbon: Thank you, Renata, and thanks to everyone for joining us today for our inaugural conference call of 2024. To start off, we'd like to outline our operational restructuring effort in Continuing Education and Medical Practice Solutions segment, to enhance synergies between active content and technology for medical education and its specialization cost for physicians. Afya has restructured its corporate structure so that all progress and services related to medical education excluding Medcon the grad courses are now managed in the same structure. Moving to the next page. We can now observe our new business structure taking shape, comprise of our three segments: Undergrad programs, Continuing Education and Medical Practice Solutions.

In the Undergrad segment, we have maintained the existing structure. However, notable changes have occurred in the Continued Education. And it is previously accounted for a content and technology from medical education, Medcel, Além da Medicina, CardioPapers and Medical Harbour, within Medical Practice Solutions are now accounted for in the Continuing Education segment. Simultaneously, the segment commonly known as Digital Services has been renamed to Medical Practice Solutions. These structural adjustments have already been implemented for the results presented in the first quarter 2024 onwards. Additionally, the comparative base from the previous year has been recalculated to account for these restructuring efforts. So moving now on to Page number 5.

Let's start with our performance highlights. Once again, Afya has recorded another strong beginning of the year. First, net revenue increased 13%, reaching R$804 million, followed by an adjusted EBITDA growth of almost 21% year-over-year, reaching R$398 million, with a margin of 49.5%, 300 bps over the same period last year. Once again, assets recording another strong quarter, showing a solid organic growth with high profitability boosted by all three segments. The adjusted net income stood at R$251 million, represent an increase of 51% when compared to the same period of 2023. And our adjusted EPS scale to R$2.74, a jump of 55% over last year. We also reported a strong cash flow from operating activities of R$429 million, an increase of 22% year-over-year, leveraged by the solid operational results of the company, with an operating cash conversion of 110% and a solid cash position of R$611 million at the end of the quarter.

Moving to our operational update of the quarter. We expanded our operational medical school seats capacity to 3,152 seats. Additionally, our number of medical school students has reached over 22,000 representing an 8.6% growth compared to the first quarter of the previous year. Lastly, our physician and medical student ecosystem reached 334,000 accounting for around 41% of all medical students and physicians in Brazil. In the next slide, we will talk about our solid business execution within our three business units. Starting with the Undergrad segment, we saw an important movement throughout the quarter, such as the higher tickets in medicine courses with more than 6% increase in tickets of medicine schools. The 40 seats expansion Guanambi Campus authorized in January of 2024 and gross margin expansion.

Continuing Education was marked by an operational structure that comes with growth and margin expansion. Considering this new segmentation, we saw an increase in B2B students, while both net revenue from B2P and B2B increased by 11% and 30%, respectively, achieving a net revenue of R$65 million in the first quarter. In our Medical Practice Solutions segment, we ended the quarter with 15% increase in active payers aligning for our gross margin expansion. In Slide number 7, we are also excited to expand our offer in the Undergrad business with the signing of the acquisition of Unidompedro and Faculdade Dom Luiz. This acquisition will contribute to 300 operating medicals seats in action Salvador capital of Bahia and the fifth largest city in Brazil and population sites.

Unidompedro will be active for medical school in Bahia and will serve as a strategic hub for all other medical campuses in the state, besides all the synergies that we can track from all Continuing Education campus in Salvador. We are affirming our strategy, Unidompedro is focused on medicine its projected net revenue for 2024 is R$110.5 million, with 88% coming from medicine course. By 2027, when the medical school reach full maturity, the projected net revenue is R$267 million with over 95% coming from medicine. Highlighting the actions, Unidompedro received a score of 4 out of 5 in both institution concept and course concept metrics, affirming the high quality of their medical course at the campus in question. The aggregate purchase price amounts to R$660 million.

We also anticipate achieving an EV/EBITDA of 4.2x at maturity post synergies. We expect the closing of transaction to be on July 1, 2024. Now, I will turn the call over to Luis Andre Blanco, Afya's CFO to give more color on the financial and operational metrics. Thank you all.

Luis Andre Blanco: Thank you, Virgilio, and good evening, everyone. Starting with Slide number 9, for discussions of key operational metrics by business unit. Our number of medical students grew 9% over first quarter 2023, reaching 22,600 students due to the maturation of our medical seats and the seat increase in Guanambi authorized in January 2024. Therefore, with reaches 3,203 seats and expected to achieve over 23,000 Undergrad medical students at maturity. Our medical school net average ticket increasing by 6.4%, reaching more than R$90,000 in the first quarter of 2024. In addition, net revenues for the Undergrad programs saw over 13% increase, achieving R$705 million, R$87 million related to medicine. All this effort means one thing, our medical education business remains and will continue to be the cornerstone of our business, in the short and middle-terms delivering high predictable growth, combined with solid profitability and cash generation.

On the next page, I will present our continued educational metrics. As Virgilio mentioned, we have probably present the new structure for the Continuing Education and Medical Practice Solutions. Strategically, we look into our Continuing Education in three different journeys. Starting from left to right with the residency journey, which encompass the products of [indiscernible] focus towards mentoring and net sale B2P. We saw an increase of 62% in active payers, obtaining around 15,000 students at the end of the period. Following the graduate journey, which includes the students from [indiscernible] and Afya Papers, it grew 12%, reaching more than 30,000 students. In other courses and B2B offerings, Afya reached 21,000 students, which represented an increase of 44%.

Summarizing, our efforts made possible for Continuing Education of net revenue to reach R$65 million in the first quarter of 2024. Compared to R$58 million in the first quarter of 2023, a growth of over 12%. Moving to Slide number 11. I will discuss the Medical Practice Solutions operational metrics. On the first graph, you can see our total active players, which are the ones that generate revenues in B2P. With a continuous growth trends, we've reached 191,000 paying users, a 12% growth compared to the last year. As you can see in the second graph in line with the previous years, we achieved 263,000 monthly active users. Lastly, in our final graph represents the net revenue of our Medical Practice Solutions, which has expanded 9% compared to the same quarter of last year, reaching R$37 million.

Breaking down the revenue within the B2P and B2B segments, we observed that R$32 million originated from B2P, while R$5 million come from B2B. It's important to mention that during the first quarter of 2024, some B2B invoices were postponed and are expected to occur in the next quarters. In the next slide, we are proud to present the impact of Afya on the medical community in Brazil. We ended in the first quarter of 2024 with more than 334,000 medical students and physicians in our ecosystem; experience our service and products, representing a 41% of market penetration. Moving forward, I would like to discuss our financial overview for the first quarter of 2024. Starting with the next slide, with great satisfaction, I'm pleased to present another robust quarterly results for Afya.

Net revenue for the first quarter of 2024 reached R$804 million, marking a significant 13% increase over the same period of the prior year. This growth can primarily attributed to higher tickets in medicine courses at 6.4%. The maturation of the medical seats, the 40 seats expansions are in the Guanambi campus, the continuing education in taking performance as the Medical Practice Solutions execution. In first quarter 2024, adjusted EBITDA increased more than 20% to R$398 million, with an adjusted EBITDA margin of 49.5%, marking an increase of 300 basis points compared to the first quarter 2023. The adjusted EBITDA margin expansion is mainly due to gross margin expansion within the three segments, the end of UNIMA and Afya Jaboatão integration process in November 2023, the ramp-up of the four medical campuses that started operations in third quarter 2022, and operational restructuring efforts in Continuing Education and Medical Practice Solutions segments.

Moving to the next slide. The cash flow from operation activities for the year increased 23%, reaching a total of R$429 million, driven by our strong operational performance. The operational cash flow conversion ratio stood at 110% for the first quarter 2024, slightly decreasing from the 112% in the first quarter 2023. Adjusted net income for the first quarter of 2024 amounted to R$251 million, an increase of 51% over the same period of 2023, mainly due to the enhancement of operational results, the reductions in the financial expenses due to the decrease in net debt and lower interest rates and lower effective tax rates. In terms of adjusted EPS, we achieved R$2.74 for the quarter, a remarkable 54% increase compared to the previous year. Our EPS was mainly positive influenced by the increase in our net income with an impact from the previous year shares reputation.

And now, moving to my two last slides, I will discuss our cash and net debt position. I also give you more color on our cost of tax. On the next slide, you see a table with the breakdown of our gross tax and the total cost of tax, considering our main debt, the soft-based transactions, debentures, account payables to selling shareholders and other financial obligations. On the next page, we can look closely to the net debt variation. In the first quarter of 2024, our net debt reached R$1.577 billion, when compared to December 2023, after reduced its net debt by R$237 million. Even considering the seat going to be earn-out over R$49 million, we reduced our net debt per adjusted EBITDA from 1.6x in 2023, to 1.2x in the first quarter of 2024, considering the mid-point of the guidance for 2024.

Considering the additional debt regarding only Unidompedro acquisition, we expect an update net debt per adjusted EBITDA of 1.6x. This ends our prepared remarks, strong performance, consistent growth and success in all segments. We are committed to provide an ecosystem that integrates educational and Medical Practice Solutions for the entire medical journey, enhancing the development updating effectiveness and productivity of health professionals. We are very proud of our business and what we have achieved so far and excited about what we plan for the future. I will now open the conference for the Q&A session. Thank you.

Operator: [Operator Instructions]. The first question comes from Lucca Marquezini from Itau. Lucca, you may now go.

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